Cincinnati Financial: Strong Dividend Still Doesn't Make this Financial a Buy

Cincinnati Financial Corp (CINF) (alt.1, alt.2).

Below are some highlights from the above linked analysis:

This insurance holding company markets primarily property and casualty coverage; it also conducts life insurance and asset management operations.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

CINF is trading at a discount to all the above. If I exclude the high and low valuation, and average the remaining two valuations, CINF is trading at a 50.9% discount. A Star is added since CINF is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:

1. Rolling 4-yr Div. > 15%
2. Dividend Growth Rate
3. Years of Div. Growth
4. 1-Yr. > 5-Yr Growth
5. Payout 15% of avg.

CINF earned one Star in this section for 3.) above. It has paid a cash dividend to shareholders every year since 1954 and has increased its quarterly cash dividend payments for 48 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to >MMA.

CINF earned two Stars in this section. The NPV MMA Diff of $14,964 is well above the level I look for. With a current yield of 5.98%, CINF exceeds the 4.61% long-term average MMA rate.

Other: CINF is a member of the S&P 500, is an Achiever and an Aristocrat. S&P believes the company is a conservative underwriter with sound risk and capital management policies. CINF has improved its underwriting, investment results and profitability in recent years. However, CINF will face price competition in its core markets. CINF also has among the lowest rates of return on equity in its peer group. If industry consolidation activity increases, CINF could be viewed as a takeover candidate.

Conclusion: CINF earned a Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of 4 Stars. This rates CINF as a 4 Star-Buy.

Using my [D4L-PreScreen.xls] model I determined the dividend growth rate could approach zero and CINF would still generate a NPV of MMA Differential close to the $3,000 that I look for from a company that is both an Achiever and an Aristocrat. Given the recent melt-down in the financial sector, most financials that have not cut their dividend are quantitatively grading out as Buy or Strong-Buy. Though interesting, CINF hasn't shown me enough to initiate a position in it.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.